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Implementing IMF governance reform: Baby steps in slow motion

29 November 2010

IMF managing director Dominique Strauss-Kahn called agreements reached on IMF governance reform “historic”. A closer analysis reveals that the shifts in votes are smaller than claimed and though after two years the basic power structure of the IMF will better incorporate large emerging markets, it will continue to be dominated by the US and Europe.

Two agreements on IMF reform were reached, one in the G20 group of countries in late October and one in the IMF board in early November. These reforms bring to a close the IMF governance reform process launched by the G20 in its Pittsburgh communiqué of November 2009 (see Update 68).

The late October G20 finance ministers’ meeting in Gyeongju, South Korea agreed to “shifts in quota shares to dynamic [emerging market and developing countries (EMDCs)] and to underrepresented countries of over 6 per cent, while protecting the voting share of the poorest, which we commit to work to complete by the Annual Meetings in 2012.” They also agreed to “a comprehensive review of the [quota] formula by January 2013” and “greater representation for EMDCs at the executive board through two fewer advanced European chairs” and “moving to an all-elected board.”

Subsequently, in early November, the IMF board formally approved a doubling of IMF quotas and the shift in quota shares, which will now have to be ratified by finance ministers and, in many countries, by parliaments. The all-elected board will require an amendment to the IMF’s Articles of Agreement, again needing approval by member states’ parliaments. The agreement has been sent to finance ministers as a single undertaking, “reflecting a political understanding that they are all part of a single package of reforms”. The sequencing contained in the single agreement explains the long delay for implementation of the reforms.

False presentation on quota

The changes will make China the third largest shareholder and will vault India, Russia and Brazil into the top ten. More than half of the 6 per cent shift to “dynamic” countries will come from other developing countries losing voting share. The paper outlining the board agreement shows that the voting share of “advanced economies” will drop from 57.9 per cent to 55.3 per cent, a loss of only 2.6 per cent.

The IMF categorised South Korea and Singapore as developing countries benefitting from the shift, despite the IMF’s own flagship analytical report, the World Economic Outlook (WEO), classifying them as “advanced economies”. By the WEO definitions, advanced economies experience a net loss of only 2 per cent. Africa, as a continent, will see its voting share drop from 5.9 per cent to 5.6 per cent.

The November agreement also marks a formal reneging on the IMF board’s 2008 promise to reform the IMF quota formula before it was used again (see Update 72). The formula, which was only agreed for temporary use in 2008, has been hotly contested by the G24 group of developing countries as improperly specified. This time the formula was used in combination with a number of other complex negotiated allocation rules to achieve the final list of 54 countries that would gain from the process. Developing countries losing voting share include Venezuela, Nigeria, South Africa, Argentina, Cameroon, Algeria, Pakistan and Morocco.

In this agreement, 60 per cent of new quota allocation will be distributed according to the quota formula while 40 per cent will be distributed via a complex set of rules, “mainly distributed to countries that are under-represented with respect to [a] GDP blend variable”. The GDP blend was specified as a compressed average share of global 2006-2008 GDP, 60 per cent measured at market exchange rates and 40 per cent measured at purchasing power parity. While the ad hoc increase was “primarily based on a uniform reduction in out-of-lineness, i.e., the difference between a country’s GDP blend variable share and its post selective quota share,” additional rules included limits placed on both potential gains and losses for rich countries, a guarantee on low-income countries not losing voting share, and small voluntarily redistribution agreed to by rich G20 countries. In the end Britain also agreed to equalise its voting share with France to keep them in joint fifth rank in the institution, despite the UK being entitled to a much larger share.

Richard Calland of South Africa-based NGO Institute for Democracy in Africa said: “The recent IMF deal is just not good enough for Africa. Not only do rich countries retain their dominance, but important developing country players like South Africa are losing out. And we will have to wait years for even these pitifully small changes to be implemented.”

Decision rules unchanged

The agreement also leaves in place the US unilateral veto over some IMF decisions. In early November, German executive director Klaus Stein emphasised that the US veto is “anachronistic at this point. For one country, no matter how big it is, to have the right to dominate decisions in that unique way is not legitimate anymore. If you talk about legitimacy, that’s the major flaw in the organisation.” Inside sources indicated that some large developing countries opposed European proposals to lower the special majority voting threshold to eliminate the US veto, because they feared they would lose their ability to block things as a group.

When Strauss-Kahn was campaigning to be selected as managing director of the Fund he had explicitly promised the use of double majority decision making at the board (see Update 57), but no progress has been made on this. With the current round of reform essentially finished, any adoption of this proposal would likely have to wait until 2013 at the earliest.

The paper on the board agreement reveals that European countries will give up two full seats on the board, not the two partial seats they had offered to rotate with developing countries, in a proposal they made before the agreement. However, the Europeans, who have not yet come to an internal consensus about how to restructure their constituencies, will keep at least eight seats until 2012.

The Bretton Woods Project is a UK-based NGO that challenges the World Bank and IMF and promotes alternative approaches. We serve as an information provider, watchdog, networker and advocate. Our flagship publications are the Bretton Woods Observer, a quarterly critical review of developments at the World Bank and IMF, and the Bretton Woods Bulletin, an online update of news and action on the institutions.